Private credit under pressure? An Asian perspective

Recent headlines in the West on private credit have centred on rising redemption requests exerting gating and liquidity pressures. For investors, the natural concern is straightforward. What happens if you want your money back but cannot immediately access it?

Is this a wake-up call for us in Asia? Let's look beyond the headlines and into how private credit funds are structured to operate, particularly in periods of stress; and examine if these  developments  in the Western markets are likely to play out in Asia.

When investors cannot exit

Private credit is, by design, an illiquid asset class. Unlike public markets, where assets can typically be sold quickly, private credit investments are often tied to longer-term lending arrangements. This structural feature is reflected in how funds manage investor liquidity.

Most private credit funds incorporate mechanisms such as lock-ups and redemption gates. A gate typically limits the amount of capital that can be redeemed at any one time or in a given period – for example, a percentage of total assets per quarter. Where redemption requests exceed that threshold, investors are often placed in a queue, with unmet redemption requests rolled over to subsequent windows.

These mechanisms are not a sign of dysfunction. By pacing redemptions, fund managers manage liquidity in an orderly fashion. Gates are designed to prevent forced asset sales prematurely that could erode value for all investors.

 In practice, when redemption pressure increases, outcomes are often more measured than headlines suggest. Investors may wait through redemption cycles, engage with managers on timing, or adjust their broader portfolio allocations. Fund managers, for their part, frequently work to accommodate requests where possible, even where they are not strictly obliged to do so.

A run on the fund benefits no one - situations are managed commercially rather than escalate into formal disputes. Maintaining of alignment with investors is key, particularly in an illiquid asset class.

What is happening in the West

Much of the recent attention has been driven by developments in the US and, to a lesser extent, parts of Europe. In these markets, a combination of rising interest rates, increased leverage and a broader investor base has contributed to heightened sensitivity around liquidity.

The marketing of private credit funds as "semi-liquid" or evergreen notwithstanding the managers' ability to gate redemptions has also contributed to a misconception around the actual liquidity of such funds. Greater participation from a wider pool of investors (retail including) has, in some cases, led to stronger redemption pressures when market sentiment shifts bringing tools such as gating into sharper focus, prompting debate about whether investors fully appreciate the liquidity profile of private credit.

Further, most of the private credit funds facing increased investor pressure for redemptions engage in direct lending to privately-owned companies, particularly in the software and technology sector. Investors have traditionally accepted risks associated with direct lending in exchange for high yields, and software companies have been viewed as a safe bet. However, the rise of AI-based services and its potential to disrupt the software industry, coupled with recent high profile private credit lenders reporting potential investor losses, have led to a loss of confidence amongst investors, particularly retail investors.

Why Asia may be different

It is not inescapable that these dynamics will replicate itself or translate directly to Asia. Allocations to private credit are often part of a broader, deliberately constructed portfolio strategy, rather than as a single or short-term yield play. Asian investors such as family offices and UHNWs often invest with a longer horizon in mind.

This distinction matters. A more patient capital base reduces the likelihood of sudden, large-scale redemption requests, allowing fund structures to operate as intended. It also shapes how investors respond when liquidity is constrained, with a greater emphasis on engagement and long-term positioning.

Private credit has emerged as an alternative financing source in Asia when banks or larger funds are not available to borrowers in the region. However, Asia-focused private credit funds are not highly concentrated on software and technology companies but offer diversification across sectors and geographies.  As these borrowers may be from developing markets and there are comparatively fewer private credit managers operating in and competing for deals in Asia, deal underwriting tends to be more conservative than in the highly competitive US market. Borrowers are often operating companies with cash flow and real assets (e.g. machinery, land) which can form part of the security package.

Structure matters in stressed markets

Another key differentiator lies in how private credit funds are structured and managed in Asia. These structural elements or differences play a critical role when markets come under pressure, as we are seeing in the US.

Private credit funds in Asia are typically offered to accredited and institutional investors  alongside a clear articulation of liquidity terms. Features such as redemption gates, lock-ups and staggered exit mechanisms are not only embedded in fund documentation; but are also more commonly understood as part of the investment proposition. These sophisticated investors are au fait with how these provisions work; conversely, retail investors who often require more systematic protection do not have easy access to private credit funds in Asia.

Secondly, most Asian private credit funds are structured as closed-ended products where investors accept limited liquidity of their investments during the fund's term, which is more aligned with the liquidity profile of the underlying fund assets. As such, an ability to redeem or withdraw from the fund during the fund life is often limited.

Pressure does not mean collapse

Even where underlying assets come under stress, the path forward is rarely binary.

Private credit defaults do not typically trigger immediate enforcement. Instead, they often lead to a period of negotiation, restructuring and coordination among stakeholders, including lenders, sponsors and other financing parties. The objective is usually to preserve value and stabilise the underlying business, rather than to pursue rapid recovery through enforcement.

This approach is consistent with the broader dynamics of the asset class. Private credit is relationship-driven, and outcomes are often shaped by alignment and coordination rather than adversarial action.

In a cross-border context - where assets, lenders and investors may be located in different jurisdictions - this need for coordination becomes even more pronounced. The ability to navigate these complexities effectively can be as important as the legal rights themselves.

A more measured outlook

None of this is to suggest that private credit is immune from pressure. Market conditions remain uncertain, and investor sentiment can shift quickly, particularly in response to global developments. Questions that do arise from what we are seeing in the West with private credit funds include its impact, directly or indirectly, on fund raising momentum in Asia for private credit and whether or not the unfolding situation in the West will lead to private credit managers there turning towards Asian opportunities instead.

However, it is equally important to avoid extrapolating too directly from one market to another. The combination of a more patient investor base, structuring differences and a focus on long-term capital deployment suggests that the trajectory in Asia may be more measured.

For investors, the current environment serves as a useful reminder of the importance of understanding liquidity terms and aligning expectations accordingly. For fund managers, it reinforces the value of disciplined structuring and transparent communication.

Private credit has always been a long-term asset class. In times of stress, its defining characteristics, including illiquidity, structure and alignment, come more clearly into view. Whether those characteristics are seen as a constraint or a strength ultimately depends on how well they are understood at the outset. If you would like to discuss how these developments may impact your portfolio or investment structures, please feel free to reach out to our legal experts.